Planning · November 03, 2022

2022 Year-End Planning Guide

Nerre Shuriah

JD, LLM, CEPA | Senior Director of Wealth Planning


At the end of 2021, we were contending with an ongoing pandemic, rising inflation and looming personal income tax increases. Those challenges haven't ceased, and 2022 has presented continued market volatility and record-high inflation. The Fed's aggressive approach to monetary policy domestically as well as geopolitical unrest have compounded these factors.

As the end of 2022 approaches, it's time to review your financial plan and consider how best to protect your wealth as we continue to weather the temporarily unfavorable factors presented to us.

In this year's Year-End Planning Guide, checklist and videos, you'll find all of this plus other key considerations and action items for your financial plan.

Financial and estate planning in a rising interest rate environment

What steps can you take to adjust your financial planning if interest rates are rising? Here are some factors to consider as you evaluate and adjust your plan for 2023.

Watch the 2022 Year-End Planning Guide video

Nerre: Hi, my name is Nerre Shuriah. I'm the Director of Wealth Planning for First Citizens Wealth Management. Welcome to the 2022 Year-End Planning Guide. Throughout this year, we've experienced ongoing market volatility and high inflation, coupled with the Fed's aggressive rate hike schedule to combat inflation. The newly passed Inflation Reduction Act also brings some opportunities to claim credits for energy saving actions. We'll consider how all of these situations impact your financial decisions and what you can do to help your financial situation.

Before we get going with our discussion, I do want to tell you that the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. For purposes of this recording, although I am a licensed attorney, I am not currently acting in that capacity and this information should not be considered as tax or legal advice. Be sure to speak with a tax professional before implementing any changes to your financial plan. If you have questions about your financial plan, be sure to reach out to your First Citizens partner.

For our Year-End Planning Guide discussion, we're going to cover a number of planning topics based on our current situation. We'll talk about financial and estate planning in a rising interest rate environment, tax planning considering the Inflation Reduction Act, and finally, retirement planning under a potential recession. For this video, let's talk about financial and estate planning in a rising interest rate environment. As you know, after an extended period of historically low interest rates, the Fed has reversed course pretty dramatically and cranked up interest rates to combat rising inflation. So what steps can you take to adjust your financial planning if interest rates are rising? Some factors you can think about are—let's lock in low rates now. Although the Federal Reserve has raised rates by 2.25% in a very short space of time, overall rates are still pretty reasonable. They're fluctuating in the 5% to 6% range right now. But when you look historically, rates have risen as high as 16% to 18% in the 1980s and the early 80s, they were in the 6% range. That was considered normal. If it makes financial sense, lock in any loans, such as your car payments, HELOCs, mortgages or refinances at current rates. The main idea to keep in mind here is if it makes sense for you, there's no need to rush to secure a loan or refinance just to lock in rates. You've got to run the numbers on your budget and consider if and why a finance purchase or refinance at this time makes sense.

The second is to consider estate planning strategies effective for high interest rates. There are numerous wealth planning transfer strategies that enable you to transfer assets or money to the next generation in a tax efficient manner, often while retaining as much control as possible. Some of those strategies, like a grant or a grantor retained annuity trust or the family loan work really well in a low interest rate environment. But by the same token, there are some strategies that work really well in a high interest rate environment or rising interest rates. When you couple our high interest rate environment with the fact that the doubled estate tax exemption that was put forth in the Tax Cuts and Jobs Act at the end of 2017 may expire at the end of 2025. Now is a good time to consider implementing one or more of those estate reduction techniques. And what are those techniques? Well, the first is a qualified personal residence trust. Oftentimes you'll hear people refer to it as a QPRT. A QPRT is a trust used to transfer personal residence to trust beneficiaries. A QPRT is created for a set term of years, so think five years, seven years, 10 years. During that time, after you've moved your house into the trust, you can continue to use it as your own. At the end of that trust term, the title to that house or residence passes to the person or persons that you identified as the beneficiary. If you want to continue living in the home, you have to pay rent at fair market value, which can be good if you have a fairly large estate and you're looking for ways to continue gifting at no gift tax. That continued payment of rent is another way for you to reduce your estate without paying gift tax on that rent. You can put up to two residences into a QPRT, including your vacation home, which could even be a boat if it's used as a home. You can use fractional interests into a QPRT, which you can share with a spouse or other co-owner.

A second wealth transfer strategy that works well in a high interest rate environment is a charitable remainder annuity trust or a CRT. A CRT is a split interest trust in which the grantor receives an annuity from the CRT for a term of years and a charity or charities receives the remainder interest at the end of the trust term. So you set up a trust, you put an asset into it, you get a benefit from it for a number of years. And then at the end of that term, your charity that you've chosen gets the remainder. So let's move on a little bit more and consider other strategies in a high interest rate environment. The last we'll talk about is to evaluate your credit card spending. Credit cards are handy tools to have at your disposal, but with many lines of credit, cards or other small personal loans, it's easy to lose track of the details. Details you want to keep top of mind are your variable interest rates and APR if you're carrying a balance on your cards, current credit card offerings, and if they align with your goals and your credit score, which is an influential factor in helping you get better interest rates should you choose to pursue new lines or refinancing. If you need to focus on paying off debt or improving your score, our strategy is pay off your small debts, even though they may have a lower interest rate, psychologically, you do get the feeling of a big win if you pay off your small debts first, then focus on paying off your high interest debts. Some methods to tackle debt may include a small personal loan or a zero-rate balance transfer to another credit card. A lot of cards offer deals that lock in that zero-rate transfer from anywhere from 12 to 21 months. Think about that. That 21 months may insulate you for almost two years and allow time for the economy to recover from elevated inflation without you paying a premium on your ballooning credit card debt in the meantime.

The views expressed are those of the author(s) at the time of writing and are subject to change without notice. First Citizens does not assume any liability for losses that may result from the information in this piece. This is intended for general educational and informational purposes only and should not be viewed as investment advice or recommendation for a security, investment product or personal investment advice.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA/SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA/SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

Tax planning considering the Inflation Reduction Act (IRA)

The IRA didn't have any specific tax provisions that targeted individual income taxpayers—however, it's prudent to keep the new law in mind when considering your tax planning for 2023.

Watch the 2022 Year-End Planning Guide: Consideration for the "Inflation Reduction Act" video

Nerre: Hi my name is Nerre Shuriah. I'm the Director of Wealth Planning for First Citizens Wealth Management. Welcome to the 2022 Year-End Planning Guide. Before we get going with our discussion, I do want to tell you that the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. For purposes of this recording, although I am a licensed attorney, I am not currently acting in that capacity and this information should not be considered as tax or legal advice. Be sure to speak with a tax professional before implementing any changes to your financial plan. If you have questions about your financial plan, be sure to reach out to your First Citizens partner.

For our Year-End Planning Guide discussion, we're going to cover a number of planning topics based on our current situation. We'll talk about financial and estate planning in a rising interest rate environment, tax planning considering the Inflation Reduction Act, and finally, retirement planning under a potential recession. Right now, we're talking about tax planning considering the Inflation Reduction Act.

The Inflation Reduction Act didn't actually have any specific provisions targeting individual taxpayers. But it is prudent to keep the Inflation Reduction Act in mind when considering your tax planning for 2023. The first thing to consider is estate tax exemption. The lead up to the Inflation Reduction Act, when we called it the Build Back Better Act, had a lot of talk about changes to the estate tax laws, none of which were included in the final Inflation Reduction Act. But sometimes doing nothing has more impact than doing something. And in this case, doing nothing may result in the estate tax double provisions of the Tax Cuts and Jobs Act being sunsetted at the end of 2025. If those provisions sunset at the end of 2025, that means the estate tax exemption, which is now thereabouts in the $12 million range, will drop back down to the $6 million range. And I'm giving you, in specific numbers, because they are inflated. If the estate tax exemption drops to $6 million, then if your net worth exceeds $6 million, you may have a considerable estate tax liability that you want to consider and start engaging in wealth transfer planning today to shore up some of that extra gifting now before 2025. Even waiting until 2024 may be too late, as most advisors may be too busy to get some of the trusts or other strategies that you need to get done, in place.

Another thing to consider that the Inflation Reduction Act doesn't do is income tax brackets. The Tax Cuts and Jobs Act changed the income tax brackets for individual income taxpayers by broadening them and lowering the amount. It also lowered the top rate from 39.6% to 37%. Without additional action from Congress, we would go back to the previous law's brackets. So although we're a few years off from the sunset, if you have the ability to recognize income early, it may be worth having a discussion with your planner about the impact the change in tax brackets could have on the taxes you pay versus if you wait to take action. Okay, for example, if you earn $150,000 in 2022, you would be in a 24% tax bracket, but back with the old rules. After the sunset of Tax Cuts and Jobs Act, you would be in a 28% tax bracket. If you accelerate some of your income now before 2026, you could take advantage of that 4% leverage.

A third item that the Inflation Reduction Act does is increase funding for IRS enforcement to the tune of $80 billion. And while this is not a specific provision that affects individuals, it will have an impact on many individual taxpayers. The IRS will spend this fund, those funds on improved technology and increase staff to enable them to better select and pursue audit targets, failure to disclose assets. They'll also pursue employers who fail to deposit payroll taxes and report foreign bank accounts. If you're compliant with reporting and tax payment rules, that will likely reduce your overall tax burden for the future and reduce your chances of being audited or targeted by the IRS.

One of the more favorable things that the Inflation Reduction Act does, is it contains several favorable tax credits for individual taxpayers. A number of things that it does is offer extensions to tax credits for home improvements such as solar panels or energy efficient upgrades, as well as extending tax credits for purchasing a new or used electric or clean vehicle. It also has two home related rebate programs that are point-of-sale programs starting in 2023 that will be implemented by your home state. For more details about these programs, please see our 2022 Year-End Guide.

And lastly, although it was done through executive action and not the Inflation Reduction Act, the Biden Administration forgave $10,000, and up to $20,000, for Pell Grant recipients worth of federal student loan debt for borrowers who earn less than $125,000 annually. Usually, cancellation of indebtedness results in reportable income, but not federally in this instance, however, we are pointing this out to you because some states are not following along with the federal tax treatment. There are some states that plan to tax the cancellation of the student debt as income. So be aware of that. The states that we're aware of are Mississippi, Minnesota, Wisconsin, Arkansas and North Carolina. That could result in quite a big hit.

The views expressed are those of the author(s) at the time of writing and are subject to change without notice. First Citizens does not assume any liability for losses that may result from the information in this piece. This is intended for general educational and informational purposes only and should not be viewed as investment advice or recommendation for a security, investment product or personal investment advice.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc.& First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA/SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA/SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

Retirement planning under the potential for recession

In addition to an established financial plan, there are other financial activities you can do to shore yourself up against risks. Here are some actions to consider.

Watch the 2022 Year-End Planning Guide: Retirement Planning in a Potential Recession video

Nerre: Hi my name is Nerre Shuriah. I'm the Director of Wealth Planning for First Citizens Wealth Management. Welcome to the 2022 Year-End Planning Guide. Before we get going with our discussion, I do want to tell you that the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. For purposes of this recording, although I am a licensed attorney, I am not currently acting in that capacity and this information should not be considered as tax or legal advice. Be sure to speak with a tax professional before implementing any changes to your financial plan. If you have questions about your financial plan, be sure to reach out to your First Citizens partner.

For our Year-End Planning Guide discussion, we're going to cover a number of planning topics based on our current situation. We'll talk about financial and estate planning in a rising interest rate environment, tax planning considering the Inflation Reduction Act, and finally, retirement planning under a potential recession. In this video, we're talking about retirement planning under the potential for recession.

Perhaps one of the greatest challenges of being an investor is keeping a level head during a turbulent time. If you've watched any of our Making Sense videos, you know that the potential for recession is very real. A common rule of thumb that many use to measure how much they want to withdraw from their retirement savings is the 4% rule. When we're doing retirement projections and a financial plan, many of our clients ask us to show their payout at 4%, and usually that works fairly well. But in a high interest rate environment, 4% can upend your retirement account and taking large distributions out of your retirement account in early years when the market is low or inflation is high, means your retirement account won't get a chance to recover when the market finally does turn back upwards, or inflation returns to normal levels. The 4% rule is good in theory, but it's shown to be poor when it's put to practical usage. You might want to be more flexible with your withdrawal rates by contracting in times of volatility or poor performance and increasing in times of higher returns. The ebb and flow of your distribution reflects will increase the likelihood of your retirement lasting all the way through your lifetime. And remember, the 4% rule was built on a 30-year retirement plan. Most retirement plans, when we project them out, half of them last 35, 40 years, maybe even more, because life expectancy is so much longer now than when the 4% rule was designed.

Always have that emergency fund. Have at least six months of liquid funds on hand for non-discretionary expenses such as your mortgage or car payments or rent. You don't necessarily need to even keep your full emergency fund in a low interest savings account either. You can obtain a secured line against investments or an equity line against real estate and let the underlying asset continue to grow if you need to use the loan. If you can, lock in a line now at a lower interest rate, that's even better. But make sure you have that fund at your fingertips if you need it.

Revisit your budget. Look at the details of your transactions, evaluate where there's high interest debt to pay off, as we mentioned, but also look at what you're paying for. Are there subscriptions that can be minimized or consolidated, and is there other unnecessary spending that might be happening? To do this, you'll have to look at your statements of over the course of more than a year. Just going back a few months may not capture all of your automatic subscriptions. Sometimes it may be over a year that you're paying for something, and you didn't realize it.

Look at your investment accounts. Make sure you diversify, review your asset allocation and rebalance. One of the greatest risks when investing isn't necessarily the market's downturn, it's your portfolio's mix of assets that causes your exposure. Make sure you have an adequate mix of assets and that they're allocated according to your goals and risks. This differs for everyone and requires the guidance and attention of a financial planner and portfolio strategists. And once you've obtained the correct asset allocation, continue to rebalance so that your portfolio doesn't drift out of course over time as you continue to make contributions or as it appreciates.

Delay Social Security. Once you reach age 62, you're eligible to file for Social Security benefits. Most people know, if you wait until full retirement age, your benefits will increase. But most people don't know if you wait until age 70, you will get an even greater benefit. Social Security is indexed for inflation. So consider we're in a high inflation environment so that is an even greater benefit to what your payout may be from Social Security. The cost-of-living adjustment for 2023 is projected to be a whopping 8.8%. We haven't seen that size adjustment since 1981. By waiting to claim, those costs-of-living increases will compound the amount and benefits that you'll ultimately receive at age 70. Plus, you'll receive an 8% retirement credit for every year between full retirement age and age 70. If you're able, you can continue to work an extra year or two and earn an additional income. If you're married and your spouse earned less than you, they could claim before full retirement age and you both could live on that payout while your Social Security benefit grows until your full retirement age or age 70.

The last financial activity you want to be aware of in a potential recession is to continue making contributions to your retirement accounts or savings. When times are tough, it's tempting to delay saving for retirement, but it's important not to get derailed by procrastination or short sightedness and forget about your long-term goals. Delaying saving for retirement can end up costing you far more in the future than a short-term recession’s effects. You would lose the time value of money and the compounding effect of appreciation. So keep your eye on the prize and continue saving to your qualified accounts or your savings accounts and you'd be better able to weather this storm or any potential future storms.

Thank you for joining us for our 2022 Year-End Planning Guide. Hopefully you'll find some of these tips and suggestions helpful. First Citizens is your all-around partner. We have a team of people and resources who are dedicated to helping you in all types of weather, both fair and foul. Give us a call and we'll guide you through this storm and prepare you for the next.

The views expressed are those of the author(s) at the time of writing and are subject to change without notice. First Citizens does not assume any liability for losses that may result from the information in this piece. This is intended for general educational and informational purposes only and should not be viewed as investment advice or recommendation for a security, investment product or personal investment advice.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA/SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA/SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

Please note that while Nerre Shuriah is a licensed attorney, for purposes of this guide, she's not acting in that capacity, and this information shouldn't be considered tax or legal advice.

Insights

A few financial insights for your life

No results found

This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.

Links to third-party websites may have a privacy policy different from First Citizens Bank and may provide less security than this website. First Citizens Bank and its affiliates are not responsible for the products, services and content on any third-party website.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC; First Citizens Investor Services, Inc., Member FINRA and SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA and SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

See more about First Citizens Investor Services, Inc. and our investment professionals at FINRA BrokerCheck.